Investment Portfolio Management

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What is Investment Portfolio Management?

Investment Portfolio Management is a blend of art and science in making decisions about investments and policy, matching investments to objectives and individuals aims, asset allocation for both individuals and institutions, and balancing risk against performance (while taking into account each individuals risk levels). Portfolio management is all about determining strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, in the attempt to maximize return at a given appetite for risk.

Once we understand the return you require from your capital, together with your attitude towards risk and capacity to absorb investment losses we are in a position to build your investment portfolio. This involves us creating your asset allocation framework to balance the risk you are prepared to accept against the return you hope to achieve.

Is All Investment Portfolio Management The Same?

Every individual has a unique investment portfolio and requires a customized investment plan. This means that the best investment plan for one person is completely different for someone else. For example, there is a different strategy or investment plan for each individual based on their income, budget, age and risk ability.
There are also many considerations per individual and household, which is why portfolio managers need to provide customized investment solutions to clients based on each client’s unique needs and requirements. For example, someone who is in his or her 20s will have a completely different investment portfolio plan than someone who is planning to retire in ten years;, as variables such as time, inflation and risk need to be measured differently for each person’s situation.
The terms and terminology can get complex – here’s a breakdown of some of the more commonly used terms within this sector to help you.

What Is Passive Management?

Passive management is for investors willing to accept market returns. Using a fixed asset allocation with a portfolio comprised of index funds would be an example of passive management.

What Is Active Management?

In active management the portfolio manager attempts to meet investment objectives through asset allocation investing and strategies that fit the portfolio owner. By reading the explanation about the types of asset allocation below you can begin to form a view as to which type would suit you best.
- What Is Strategic Asset Allocation?
In a strategic asset allocation the portfolio mix is fixed according to the investor’s profile. A popular mix would be 60% equities, 30% bonds, and 10% cash. This would be considered passive management.
- What Is Tactical Asset Allocation?
In a tactical asset allocation the portfolio mix is not fixed but can be changed when conditions change. Risk is managed on a continual basis through portfolio rebalancing.

What Investing Strategies Are Used In Investment Portfolio Management?

1. Value Investing
The objective of value investing is to purchase assets that trade at a discount to their intrinsic value. The main idea of value investing is that the price you pay matters.
For example, you can’t just buy a stock because it represents a great company. The price of the stock may be overvalued because it has been bid up. Buying the stock at the high price will greatly reduce your long term returns and increase the chances of losing money.
2. Contrarian Investing
Similar to value investing, contrarian investors try to buy assets that are bargains, but also attempt to use behavior science studies that measure technical indicators such as consumer sentiment.
Contrarians will do the opposite of what “the herd” is doing. This is the theory: If 95% of investors believe an investment asset is moving in a certain direction, then they have already acted and there is little or no catalyst to propel the asset in the same direction.
3. Growth at a Reasonable Price
Investors who subscribe to growth at a reasonable price invest in growth companies but attempt to exclude putting stocks in the portfolio that are extremely overvalued.
4. Growth Stock Investing
This strategy advocates purchasing companies with above average earnings growth regardless of valuation.
5. Momentum Investing
This is strategy of buying stocks that have done well in a short period of time (i.e. 3 – 12 months) and selling stocks with poor momentum. This strategy gained popularity in the 1990’s but destroyed many investor portfolios in the 2000 dot com bust.

How Important Is Risk Management In Investment Portfolio Management?

It’s important that your chosen Financial Advisor should know and understand your level of risk aversion. You should expect a good Financial Advice team to have an in-depth discussion with you about your level of risk aversion or whether you are willing to invest in a high-risk fashion. In other words, your Financial Advisor should already be selecting products to propose to you with Risk Aversion / Management at the forefront of their mind. In any case, every investor should have an investment risk management plan that includes:
- Diversification Rules
Investment diversification reduces the overall risk of a portfolio. Diversification lowers portfolio volatility without reducing expected returns.
- Maximum Portfolio Drawdown
How much of your investment portfolio you are willing to lose; or maximum portfolio drawdown, is a measurement of a portfolio decline from a peak to its lowest point. This is critical risk management concept that very few investors give consideration to. Develop a policy and you will sleep better at night, and improve your investing skills.

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